Opinion
Rehearing Denied Jan. 24, 1966.
Roger Arnebergh, City Atty., Bourke Jones, Asst. City Atty., James A. Doherty, Asst. City Atty., and Robert C. Summers, Deputy City Atty., for defendant and appellant.
John H. Maynard, William H. Birnie and Jule N. Kvamme, Los Angeles, for plaintiff and respondent.
HERNDON, Justice.
Defendant, the City of Los Angeles, appeals from the judgment ordering it to refund that portion of the tax imposed upon respondent's local Fresh Milk and Ice Cream Division which had been measured by the gross receipts attributable to respondent's selling activities conducted outside the City of Los Angeles.
The tax in question is imposed by the provisions of Los Angeles Municipal Code sections 21,166 (wholesale) and 21.167 (retail) and the method of apportioning such taxes is provided by City Clerk's Ruling 14. These ordinances specify the rates of city business taxes for 'Every person manufacturing and selling any goods, wares or merchandise at [wholesale--21.166 or retail--21.167], or selling any goods, wares or merchandise at [wholesale--21.166 or retail--21.167], and not otherwise specifically taxed by other provisions of this Article, * * *'
Section 21.15(h) of the Los Angeles Municipal Code provides: 'The City Clerk may make such rules and regulations as are not inconsistent with the provisions of this Article or Article 1.5 as may be necessary or desirable to aid in the enforcement of the provisions of this Article and Article 1.5. When, by reason of the provisions of the Constitution of the United States or the Constitution of California, the business tax imposed by this Article cannot be enforced without there being an apportionment according to the amount of business done in the City of Los Angeles, or in the State of California, as the case may be, the City Clerk may make such rules and regulations for the apportionment of the tax as are necessary or desirable to overcome the constitutional objections. Such rules and regulations Following the decisions of our Supreme Court in City of Los Angeles v. Belridge Oil Co., 42 Cal.2d 823, 271 P.2d 5 and 48 Cal.2d 320, 309 P.2d 417, the city clerk promulgated the following rules:
'PART I
'1. (a) Whenever a person is engaged within the City of Los Angeles in a business subject to a tax under Section 21.166, 21.167 or 21.168, L.A.M.C., only those gross receipts which are directly attributable to the business engaged in within the City of Los Angeles shall be included in the measure of the tax.
'(b) If a person so engaged in business does not own, lease, occupy or otherwise maintain within the City of Los Angeles, a place or premises upon which or from which he engages in business, those receipts which are specified by Ruling 13 for inclusion in the measure of the tax shall be considered directly attributable to the business engaged in within the City of Los Angeles.
'(c) If the person engaged in such business owns, leases, occupies or otherwise maintains within the City a place or premises upon which or from which he engages in such business, all receipts resulting from sales of goods, wares or merchandise which are in any manner attributable to business functions carried on, at, or from that place of business, and which goods, wares or merchandise are either sold for shipment into the City of Los Angeles to the purchaser or his agent or designee, or are shipped from a place within the City of Los Angeles to a place within the City, or from a place within the City to a place outside the City but within the State of California, shall be considered directly attributable to the business engaged in within the City.
'(d) If the person engaged in such business owns, leases, occupies or otherwise maintains within the City of Los Angeles a place or premises upon which or from which he engages in business and has receipts which are attributable both to business activities based upon that place of business and business activities carried on outside the City of Los Angeles, 25 percent of the receipts resulting from the sale of goods, wares or merchandise manufactured and sold or sold by the person which are not shipped from or into the City of Los Angeles as provided in paragraph (c) above, shall be considered directly attributable if four or more of the elements of the selling process listed below take place within the City of Los Angeles with respect to the sales of goods, wares or merchandise which produce those receipts; if less than four of the listed elements of the selling process take place within the City, 15 percent of the gross receipts so derived shall be considered directly attributable.
'For the purpose of determining the amount of attributable gross receipts which shall be considered directly attributable for the purposes of this paragraph (d), the following elements of the selling process shall be considered:
'1. Negotiating sales of, or soliciting, receiving or taking orders for the sale of goods, wares or merchandise, and/or carrying on activities by an employee, agent, or otherwise, designed to promote, stimulate or otherwise encourage the sale of goods, wares or merchandise.
'2. Display of articles or samples of goods, wares or merchandise of like or similar kind to those offered for sale where the actual articles sold or to be sold will be delivered from a place of storage or manufacture located outside the City of Los Angeles but within the State of California.
'3. Processing of orders received or taken preparatory to their being accepted, where the actual acceptance occurs elsewhere.
'4. Approval or acceptance of orders received or taken.
'5. Giving and order for or arranging for delivery or shipment of articles sold or to be sold from a place of storage or manufacture located outside the City of Los Angeles but within the State of California. '6. Billing for goods, wares or merchandise sold.
'7. Receiving or collecting receipts (as defined in sub-paragraph (a) in Section 21.00) resulting from sales of goods, wares or merchandise.
'It is recognized that many persons carrying on the business of selling goods, wares or merchandise will not have their functions so organized that all of the elements of the selling process listed will be present; it is further recognized that certain of the elements listed may occur simulaneously, or nearly so, with other elements in all or a portion of the transactions of sale handled by a particular person. Notwithstanding, each of the elements present shall be considered as a separate element for the purposes of this regulation.
'It shall be recognized that certain businesses are subdivided into divisions or organized along functional lines for the convenience of administration and management and that it is to be expected in some cases that the operations of a particular division or functional unit of a taxpayer may call for the application of the 25 percent rate, and the operations of another may call for the application of the 15 percent rate. Due regard for such divisional or functional organization shall be made in administering the license tax ordinance under the provisions of this ruling.'
It is apparent, of course, that only subsection (d) of Rule 14 is directly applicable to the factual situation presented in the Belridge decisions. The business of Belridge Oil Company was described as follows in 42 Cal.2d 823, at page 825, 271 P.2d at page 7:
'Defendant company is engaged in the production and sale of crude oil and natural gas. All of its wells are located in Kern County, which is the scene of all productive operations. The field office of the defendant is located in Kern County while the main office is situated in the City of Los Angeles. Its various products which are marketed under long-term contracts, are delivered to the purchasers directly at the field plants and never enter the territorial limits of the city of Los Angeles.' (Emphasis added.)
In Belridge, both the trial court and this court (260 P.2d 217) held that section 21.166 of the Los Angeles Municipal Code did not apply to Belridge's operations. We agreed with the trial court that since the section stated that it applied only to businesses engaged in 'manufacturing and selling any goods, wares or merchandise at wholesale, or selling any goods, wares or merchandise at wholesale,' it must have reference to (1) businesses that conducted both their manufacturing and selling operations within the city, or (2) mercantile businesses that were not engaged in manufacturing. That is to say, it was reasoned that since it was conceded that Belridge was not engaged in 'manufacturing and selling' within the city, it would be unreasonable to interpret its operations within the city whereby it marketed the products it produced, production being the dominant nature of its business, as sufficient to convert it into a 'business' devoted to 'selling' so as to subject it to a tax measured by its gross receipts.
These determinations, however, were overruled by our Supreme Court in the first Belridge decision, supra, 42 Cal.2d 823, 271 P.2d 5. The court stated at page 828, 271 P.2d at page 9:
'Keeping in mind the broad scope and purpose of section 21.166 it becomes apparent that it was intended to cover all businesses engaged in manufacturing and selling at wholesale in the city and also those businesses which merely engaged in selling at wholesale in the city. Thus all businesses which are engaged in selling goods, wares or merchandise at wholesale in the City of Los Angeles and which are not licensed by other sections of the ordinance come within section 21.166. This is true regardless of whether they are engaged in 'manufacturing and selling' or merely 'selling.' The important thing is that they are engaged in selling within the City of Los Angeles. If they are so engaged, all gross receipts attributable to selling in the City of Los Angeles are subject to the business 'Section 21.166 of the tax ordinance was meant to cover those business, not covered by other sections, which are engaged in selling goods at wholesale in the city. It is so worded to include those who manufacture and sell as well as those who merely sell in the city. The fact that an organization is engaged in selling in the city is sufficient and it is of no import that selling is but a small part of the total effort or that selling is not difficult for the instant company. There is no reason to believe that the authors of section 21.166 were concerned with the degree of effort or expense involved in the selling of goods nor were they concerned with whether or not selling was the dominant or incidental activity of the company. The main concern would appear to be whether or not the company was engaged in the selling of goods. The purpose of the section was to place a business license tax on those activities [selling] which took place within the City of Los Angeles regardless of their relationship to activities [other than selling] outside the city.' (Emphasis added.)
Additional repetitions of this central theme recur throughout the decision. ' The business license tax in question here, is based on the fact that the selling activity is carried on within the city and it is immaterial where the products are produced or delivered.' (Page 830, 271 P.2d page 10) 'The business license tax here sought to be collected is a privilege tax, exacted for the privilege of engaging in the activity of 'selling.' When this activity takes place within the city, the rate of tax may be measured by the gross receipts derived therefrom.' (Page 831, 271 P.2d page 10) 'The activity being taxed here is the activity of selling and such activity can be taxed by the city even though the goods never enter its territorial limits.' (Page 831, 271 P.2d page 10) (Emphasis added throughout.) Having thus interpreted section 21.166, the court concluded at pages 831-832, 271 P.2d at pages 10-11:
'In the instant case we can find no objection, constitutional or otherwise, to the imposition of a business license tax on the privilege of engaging in selling activities within the city. Likewise there is no objection to basing the rate of such tax on the gross receipts attributable to such selling activities, even though various extraterritorial events contribute to such gross receipts. There is, however, one important limitation which should be pointed out and that is this: even though the city can tax the activity of selling it can only base the tax on such selling activities as are carried out within its territorial limits. For this reason it is only those gross receipts which are attributable to selling activities within the city which should form the basis for the rate of tax. Gross receipts attributable to selling activities conducted outside the city should not be included. Such a construction necessarily follows from the fact that the business license tax is on the privilege of engaging in selling activities in the city of Los Angeles and as such should only be based upon such activities. * * * To allow a city to levy a license tax based upon gross receipts attributable to selling activities outside the city would be an unreasonable discrimination and a denial of equal protection of the law. See Ferran v. City of Palo Alto, 50 Cal.App.2d 374, 122 P.2d 965. If such taxation were allowed it would unjustly discriminate against those firms whose selling activities in Los Angeles compose but a small fraction of the total sales effort and whose gross receipts are in large part attributable to selling activities in other areas.' (Emphasis added.)
This conclusion, that the tax was imposed only upon the business of selling and The instant case presents a factual picture almost the exact converse of that considered in Belridge. Here, respondent is engaged in 'manufacturing and selling' within the city and the dominant portion of its business appears unquestionably to be devoted to 'manufacturing' and such activity is carried on almost exclusively within the City of Los Angeles. The case was submitted upon an agreed statement of the facts, augmented by the testimony of one of respondent's officers. Among these agreed facts were the following:
'4. Carnation Company (hereinafter referred to as 'the company') has its general corporate offices on Wilshire Boulevard within the City of Los Angeles, from which offices it performs the managerial, accounting, financial, treasury, purchasing, marketing, and legal functions customary and necessary for the operation of a large manufacturing and selling business. The company operates manufacturing and processing plants in Los Angeles, in other parts of California, and in many other states and sells the products so produced throughout the United States.
'5. The tax here in question is measured by the receipts from sales by the company at wholesale and retail to customers located outside the City of Los Angeles, in unincorporated areas and other municipalities, of products manufactured in the City of Los Angeles. Said products consist of milk, ice cream, butter, eggs, cottage cheese, other dairy products, and fruit juice and drinks, all of which are processed or manufactured at the company's plant at 1639 North Main Street within the City of Los Angeles, except cottage cheese, which is manufactured at the company's Bakersfield plant, and except butter, eggs and fruit juice and drinks which are packed for the Company by other suppliers, and distributed through the company's plant in Los Angeles.
'6. The deliveries in question are made through employees who drive trucks on wholesale and retail routes. Some of the routes are exclusively outside the City of Los Angeles and some are both within and without the City. The merchandise is either transported directly to the customers from the plant at 1639 North Main Street or is transported by relay truck to two other distribution points within the City of Los Angeles where it is loaded on wholesale or retail trucks for delivery to customers. (It is also transported to other distribution points located outside the City of Los Angeles, but the sales from those points are not in issue.) Only those receipts from goods which are sold to customers located outside the City of Los Angeles are in issue.
'Within respect to the goods delivered to customers located outside the City of Los Angeles, the sale are made as follows:
'Wholesale: The wholesale business consists of sales to stores, restaurants, hotels and organizations which resell the merchandise to consumers. For wholesale routes the driver loads his truck the night before at one of the three points within the City of Los Angeles with quantities of merchandise which experience has shown will be sufficient to satisfy the needs of customers upon whom he will call. When he leaves the plant the next day he travels a pre-determined route and calls upon pre-determined existing customers. He does not have specific orders for any of the merchandise on the truck, however, except for a few phone orders as explained below. At each stop the driver consults with the individual who is either responsible for purchasing the products or for determining the amount to be accepted. They agree as to the quantities of various products which will be left that day. The driver then writes up the order, and the customer signs for the merchandise or pays cash.
'Occasionally a customer, such as a restaurant or hotel, will telephone the company 'At the end of the day the driver advises the company office of the detail regarding credit sales and turns in cash collected. He is given credit for all merchandise thus sold on credit or for cash and for any unsold merchandise turned in. He may elect to hold some of unsold merchandise under refrigeration on the truck for sale the next day.
'Bills are sent from the plant office to the customers and carried as accounts receivable by the company.
'Salesmen for the company's plant in Los Angeles call upon potential customers within and without the City solicit their business. Such salesmen report to the sales manager at the company's plant in Los Angeles. The drivers do not solicit new accounts but refer any information as to potential customers to such salesmen. No written contract is entered into with a new customer. When he indicates his willingness to become a customer the salesman or customer will notify the plant and the driver thereafter stops regularly at his place of business. He is free to cut off his purchases from the company at any time.
'Retail. The retail business consists of sales directly to the consumer, delivered to his home. The retail truck is loaded with quantities of merchandise based upon experience with the home delivery customers on that day's route, but no specific orders are in hand. The amount left at each house depends upon standing arrangements or upon oral or written instructions given by the customer upon the driver's arrival. No customer is under any obligation to purchase products when the driver arrives at his home.
'Most of the new customers are solicited by the drivers; some are solicited by salesmen for the plant; and some come in through phone calls from the customer asking that deliveries be started at his house.
'On retail routes the driver keeps a record of his sales from day to day, prepares the bills, and delivers them to the customer. The customer will usually pay the driver directly but may mail the remittance to the company plant.
'7. On both the wholesale and retail routes title to the merchandise sold to customers located outside the City of Los Angeles passes outside the City of Los Angeles.
'8. On or about April 7, 1961, plaintiff paid to defendant the sum of $9,779.05 of taxes plus $1,189.42 of interest. Part of such tax was computed upon receipts from sales at wholesale and at retail to customers located outside of the City of Los Angeles. Plaintiff has duly filed a claim for refund of the portion of such taxes that it alleges to be so computed in the manner and within the time prescribed by law. Said claim was in the amount of $7,942.05, plus interest. Said claim has been denied.'
In addition to these agreed facts, the testimony of respondent's General Sales Manager in support of the judgment has been fairly summarized as follows:
'The wholesale dairy business consists of sales to stores, restaurants, hotels and other organizations which resell the merchandise to consumers. This business in and about the City is highly competitive. In addition to competition with other independent companies, plaintiff must compete with * * * dairies which are wholly or partially owned by supermarket chains. Generalized sales activity such as advertising, sales meetings, efficient delivery and billing for goods sold, will not sell this merchandise. A wholesale customer, such as a store, restaurant or hotel, will not choose plaintiff from 'To do this personal selling, the salesman must go to the customer's place of business; he does not summon the customer to the Main Street Plant. If the customer is a grocery store, for example, located outside the City, * * * the salesman must go outside the City to make the sale. He must spend time at the customer's store talking to him about plaintiff's products, showing how they would fit into his product line, convincing him that plaintiff's products are superior, that the prices will be competitive and that whatever volume he requires will be available when the wholesale route truck arrives at his place of business.
'The salesman finds his potential customers by driving up and down the street and noting places which would sell milk, ice cream and other dairy products; by reading trade magazines and other periodicals which are delivered to his home and which announce prospective openings of stores, restaurants and other outlets; by talking to salesmen of other products within the food and related industries who may have heard of prospective store openings or changes in ownership; by referrals from existing and prospective customers; by leads which are furnished from the head office; and by any other means which he can develop.
'When a customer has agreed to take plaintiff's products, the salesman must work with the customer at his place of business to build up the customer's sales volume of plaintiff's products. The customer can buy from the Company only as much product as he can resell to his own customers. This volume building must take place primarily at the customer's place of business.
'If the customer is a chain store, the salesman must continue to work with the manager at each individual store to make sure that the total volume of this chain store account is satisfactory. If the volume is not maintained at a high level, the account will be canceled by the chain store headquarters. * * *
'New retail customers are secured by the following means: (a) Solicitation by retail route salesmen who are also the drivers of the retail route trucks on each route. (b) Solicitation by retail solicitors who are paid on a commission basis for new accounts which they secure. (c) In a few cases an individual will phone into the office asking that milk be delivered to his home.
'The retail route salesman (driver) is responsible for building up and maintaining his route. He contacts new homeowners and calls door to door in establishing and maintaining his route. He allows the housewife to sample his products and otherwise carries on personal salesmanship. He retains her business by giving satisfactory service. The incentive to secure new customers is provided by paying him commissions on sales above a certain level. A good retail route salesman can earn as much as $10,000 per year, including commissions.
'The retail solicitors are paid on a commission basis also carry on their sales activities directly at the customer's home.'
Appellant contends that since respondent's business activities do not fall within subsection (d) of Rule 14, designed to apply to the specific factual situation presented in the Belridge cases where the goods sold were never brought into the City of Los Angeles, the applicable tax base is provided by subsection (c) of this rule. As heretofore noted, this subsection provides:
'If the person engaged in such business owns, leases, occupies or otherwise maintains within the City a place or premises upon which or from which he engages in such business, all receipts resulting from sales of goods, wares or merchandise which are in any manner attributable to business functions carried on, at, or from that place of business, and which goods, wares or merchandise are either sold for shipment into the City of Los Angeles to the purchaser or his agent or designee, or are shipped from a place within the City of Los Angeles to a place within the City, or Appellant argues that the application of the law of the Belridge decisions should be restricted to the factual situation there presented and that the broad language of the opinion interpreting sections 21.166 and 21.167 should not be considered as applicable beyond that specific situation. That is to say, appellant contends, in effect, that it is only when the goods sold never enter the city that gross receipts attributable to selling activities outside the city must be apportioned, but that when such goods are either shipped into or out of the city no such apportionment is required. We regard it as beyond our power to enunciate a rule consonant with appellant's contention since it would contradict express and unequivocal language of our Supreme Court in the Belridge decisions.
Appellant's brief is devoted to argument of the proposition that a privilege tax placed upon a business, such as respondent's, which utilizes nearly all its capital investment and its employed personnel in the production and manufacture of products within the city, may constitutionally be based upon its total gross receipts even though some portion of its actual sales activities occur outside the city. We think this proposition may be conceded, but it misses the true point in issue here. The issue here is not what the authors of sections 21.166 and 21.167 might constitutionally have done, but rather what is the true meaning and effect of the binding interpretation placed upon the language of the presently applicable ordinance by our highest tribunal.
Similarly beside the point is any argument relating to the clearly reasonable proposition that a business engaged in both manufacturing and selling within the city should be expected to pay a higher price for the benefits it derives from such extended activities than should a business with similar gross receipts that conducts only its selling activities within the city. From the emphasized language used in the quotations from Belridge, supra, it is clear that our Supreme Court has construed the tax to be one placed solely upon 'selling activities' and not manufacturing activities. It was repeatedly stressed that it was 'selling activities' that were taxed by section 21.166 and 21.167 that 'this is true regardless of whether [the businesses] are engaged in 'manufacturing and selling' or merely 'selling."
We cannot ignore such clear expressions as the following: 'The fact that the goods sold are produced in remote areas is unimportant. It is also immaterial whether they are produced in company owned plant or purchased from an independent producer. * * * [I]t is of no import that selling is but a small part of the total effort * * * There is no reason to believe that the authors thors of section 21.166 were concerned with whether or not selling was the dominant or incidental activity of the company. * * * The business license tax in question here, is based on the fact that the selling activity is carried on within the city and it is immaterial where the products are produced or delivered.'
We recognize the strength and the logic of certain of the arguments advanced by counsel for the city. It may be that our Supreme Court will deem it appropriate to reexamine the Belridge decisions in the light of the effect of the language thereof as applied to the facts of the instant case. If not, it seems reasonably probable that the City of Los Angeles will wish to give consideration to some appropriate revision of its ordinances. However, neither of these considerations can be regarded as sufficient to empower this court or the trial court to do other than follow the interpretation heretofore placed upon the applicable sections by our Supreme Court. That interpretation requires appropriate apportionment.
The trial court in its memorandum opinion correctly noted that the city clerk's method of computing the tax was improper under the Belridge decisions, since it provided for no apportionment between 'in-city' and In the second Belridge case, 48 Cal.2d 320, 322, 309 P.2d 417, 418, the court noted: 'The primary argument of the plaintiff is that this court did not, in its prior opinion, hold that there should be an allocation of the total gross receipts of defendant based upon the selling activities directly attributable to the Los Angeles part of defendant's business.' (Emphasis supplied by the Supreme Court.). It answered this argument on page 323, 309 P.2d on page 418 by reference to its prior decision:
'We also specifically held ([City of Los Angeles v. Belridge Oil Co., supra, 42 Cal.2d 823], pp. 831, 832, 271 P.2d 5) that 'There is, however, one important limitation which should be pointed out and that is this: even though the city can tax the activity of selling it can only base the tax on such selling activities as are carried out within its territorial limits. For this reason it is only those gross receipts which are attributable to selling activities within the city which should form the basis for the rate of tax. Gross receipts attributable to selling activities conducted outside the city should not be included. * * *'' (Emphasis added.) The court in the second Belridge case therefore concluded (p. 324, 309 P.2d p. 419):
'Having heretofore held that only that portion of the gross receipts directly attributable to defendant's selling activities carried on in the city of Los Angeles may be taxed under section 21.166, and the parties having stipulated that by a method of allocation 'fairly calculated to determine the defendant's gross receipts' 20% thereof was derived from selling activities in the city of Los Angeles, we conclude that the trial court was correct in applying the tax formula to 20% of defendant's gross receipts.' (Emphasis added.)
Faced with a ruling by the city clerk that purported to include all gross receipts if they were 'in any manner attributable to business functions' rather than 'directly attributable to selling activities,' the trial court had no alternative but to order all of the tax based upon gross receipts resulting primarily from 'out of city' sales activities refunded to respondent or to effect its own apportionment. Appellant has benefited from the trial court's determination to adopt the latter alternative and has wholly failed to demonstrate that the following finding is not supported by the evidence: 'Seventy-five percent of the gross receipts in question from sales to customers located outside the City of Los Angeles were directly attributable to plaintiff's selling activities carried on outside the City, and twenty-five percent of the said gross receipts were directly attributable to selling activities carried on within the City of Los Angeles.'
The judgment ordering a refund of 75 per cent of the tax in question is therefore affirmed.
ROTH, P. J., and FLEMING, J., concur.